Roughly twenty years ago, Canadian companies started exploiting the tax advantages by forming trusts. These trusts offer investors tax deferred and tax exempt income possibilities. They provide their investors with stable monthly cash payouts.
Here’s how it works:
These oil and gas trusts acquire smaller companies and assets with known reserves. This greatly cuts down the speculative risk that smaller exploration companies face. They know the oil is in place.
After the purchase, production from the oil and gas fields creates a higher cash flow for the company. The higher cash flow directly translates to greater monthly dividends.
So when is the other shoe going to drop?
The answer, possibly, is never–so long as energy prices continue to rise. When oil starts trading over $100 a barrel within two years, the value of these trusts is going to skyrocket.
Too Good to Be True
Even the catch isn’t life-threatening for the outlook of these trusts.
The Canadian government–currently run by the conservative party–has announced that the tax advantages of trusts will end in 2011.
After that news came out, trust prices dropped. Some even disbanded. With energy prices on the rise, that drop means these trusts are sorely undervalued. Here’s the simple fact: Solid trusts will merely adjust to the proposed changes. If a trust’s management is worth its salt, they’ll find a way to keep their investors happy.
And the future tax changes aren’t set in stone, either. The conservative party is facing a harsh public backlash from citizens over this. Trust yields provide a stable source of retirement income for many older Canadians.
Whether the energy trusts can weather this political storm depends on the strength of the individual trust. The tax change is a worst-case scenario–yet you still have four years before it takes effect. A lot can happen in that time. Compromises can be made, and politicians can decide to retract the new law.